The following excerpt is from the case study "The Euro in crisis: Decision Time at the European Central Bank". (distributed in the class)
"......a bailout for Greece would send a signal to other indebted member states that the ECB would step in if private lenders become nervous."
Answer the following questions with appropriate diagram and using AD-AS model, Money market, aggregate expenditure model, and forex market (as required). For part a, b and c appropriate diagrams are MUST. Else points will be deducted.
a. When ECB went out for bail out then what was expected to happen to the interest rate in Greece?
b. Comment on the expected outcome of this policy on behalf of ECB. Provide diagram and detailed explanation on output and prices.
c. If government of Greece also increases (assume) the expenditure (expansionary fiscal policy) then what do you think can potentially happen to prices? Provide the relevant diagram and explain your answer.
d. Overall do you think that bail out of Greece is healthy policy from the perspective of ECB? Answer this one in context of the Case study.
e. Explain why a group of economist thinks that a common currency like Euro for the region is not a good idea. Restrict your answer to the concepts discussed in the class and the case study. Page limit is one page.